If you or your spouse owns a business that is subject to division in divorce, receiving a fair amount during property division may depend on proper business valuation. What should business owners consider when establishing the value of their business in divorce?
What methods can business owners use to value their company?
Because of the impact that your business’s current situation and the conditions of the market can have on valuation, your business might be valued very differently depending on the method you use. Three common business valuation methods are:
- Asset-based valuation—When your business has invested significantly in real estate, equipment or store stock, it may make sense to use a valuation method based on that investment. This can either involve calculating a business’s values and liabilities or estimating the proceeds if the business liquidated its assets.
- Earning-based valuation—Whether working with past earnings or projecting future earnings, an earning-based approach to business valuation estimates how much your business is worth based on its potential for future profits. It is important to remember when choosing this method that future earnings are uncertain and may vary depending on many economic factors.
- Market-based valuation—If comparable businesses in your market have sold recently, a market value approach can offer insight into the price that your business could achieve. However, this valuation approach depends on the recent sale of comparable businesses in the market and cannot be accurate without those transactions to compare.
Once you know the value of your business, what comes next?
Once you know the value of your business, you can work with your attorney to see which of these three potential approaches in property division is best for your circumstances: maintaining co-ownership, buying out your spouse’s share or selling the company and splitting the proceeds. Each of these approaches has benefits and may cause unique challenges, so careful consideration is key in deciding what approach to take. An experienced attorney can offer helpful insight into which approach will best fit your goals for both your business and your life after marriage.